Drawdown is the decline in an account from its highest point to the next low, usually expressed as a percentage of that peak, and the largest such decline over a period is called the maximum drawdown. It matters because recovery is asymmetric: a loss of 50% does not need a 50% gain to undo, it needs a 100% gain, since the gain is earned on a balance that is now half the size. The general formula is gain needed = drawdown / (1 − drawdown), which means the required recovery grows much faster than the loss itself - a 20% drawdown needs 25% back, a 50% drawdown needs 100%, and a 90% drawdown needs 900%. That asymmetry is the reason risk management is mostly about avoiding deep drawdowns rather than chasing returns, and why the size of each individual bet matters far more than it looks when a strategy is winning. The rest of this article puts numbers on both halves: how much a given drawdown costs to climb out of, and how quickly a plain losing streak digs one at different risk sizes.
What drawdown measures
Drawdown is measured from a peak, not from the starting balance: if an account grows from 10,000 to 12,000 and then falls to 9,000, the drawdown is 25% of the 12,000 peak, even though the account is only 10% below where it started. Measured on equity rather than balance, it also counts floating losses on positions that are still open, which is why an account can show a deep drawdown without a single losing trade having closed yet. Maximum drawdown is the single worst peak-to-low stretch in the period being examined, and it is the usual headline number for how painful a strategy was to hold.
Why recovery is asymmetric
A percentage gain is always earned on the current balance, so after a loss the same percentage is worth less money. The table shows the gain required to get back to the previous peak from each drawdown depth:
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100.0% |
| 75% | 300.0% |
| 90% | 900.0% |
The curve is gentle at first and then bends sharply upward. Below about 20% the recovery is roughly proportionate; past 50% it stops being a realistic goal for most strategies, which is why many traders treat 50% as the point of no return rather than a mere setback.
How fast a losing streak digs the hole
Risking a fixed percentage of the current balance on each trade, ten losses in a row leave (1 − r)10 of the account, where r is the risk per trade. A streak that long is unlikely in any single run of ten trades but becomes a matter of when, not if, over enough trades, and the damage it does depends almost entirely on how much is risked per trade:
| Risk per trade | Drawdown after 10 losses | Gain needed to recover |
|---|---|---|
| 1% | 9.6% | 10.6% |
| 2% | 18.3% | 22.4% |
| 5% | 40.1% | 67.0% |
| 10% | 65.1% | 186.8% |
The same ten losses are a nuisance at 1% risk and close to fatal at 10%. Nothing about the strategy changed between the rows - only the size of each bet - which is exactly the point made in position sizing, and the reason methods that increase size after a loss, covered in why martingale and grid strategies blow up, move a streak along this table in the wrong direction.
A backtest's maximum drawdown is a floor, not a ceiling
The maximum drawdown a backtest reports is the worst stretch inside the specific period that was tested. A longer losing streak, wider spreads, or a market regime the sample never contained can all produce a deeper one live, so it is safer to size a strategy for a drawdown noticeably worse than the tested one. Drawdown limits also show up as hard rules in funded-account programs, where a static and a trailing limit behave very differently - see why profitable EAs fail prop firm challenges. Several positions that move together deepen a drawdown faster than their count suggests, which is the subject of correlation risk.
What to do with the number
Decide the largest drawdown that is genuinely tolerable before going live, then work backward: pick a risk per trade small enough that a streak well beyond the backtest's worst still stays under that limit. Compare the tested maximum drawdown against that ceiling with a margin, not against zero. And keep the recovery table in mind when a drawdown is already under way - the temptation to take bigger risks to win it back quickly is exactly what pushes an account further down the curve.
Common questions
What is drawdown in trading?
Drawdown is the decline in an account from its highest point to a subsequent low, usually expressed as a percentage of that peak. The largest such decline over a period is called the maximum drawdown, and it is the standard measure of how deep the worst losing stretch was.
Why does a 50% loss need a 100% gain to recover?
Because the gain is measured against a smaller balance. If 10,000 falls 50% to 5,000, a 50% gain only brings it to 7,500; getting back to 10,000 needs 5,000 of profit on a 5,000 balance, which is a 100% gain. The general formula is gain needed = drawdown / (1 - drawdown).
Is a backtest's maximum drawdown the worst that can happen?
No. A backtest's maximum drawdown is the worst stretch within the specific period tested, and live trading can produce a deeper one - a longer losing streak, wider spreads, or a market regime the test period never contained. It is a floor for planning, not a ceiling.
How can I limit drawdown in an automated strategy?
The main lever is risk per trade: a smaller percentage risked on each position makes any losing streak dig a shallower hole. Beyond that, avoid position sizes that grow after losses, avoid holding several positions that move together, and set a maximum acceptable drawdown in advance so the strategy is sized to it rather than discovering it live.